The Fed suckered IBM into a failing cloud strategy?

The joke around the office was that we'd replace one person locally with three people overseas, losing the output of two people, since the three overseas people were so clueless they'd need a local person holding their hands full-time. I was doing microprocessor design at the time, and the community is small enough that everyone know that Intel was getting good folks overseas. But even at the reduced wages outside the U.S., IBM was cutting corners and not hiring the best people.

Even locally, they try to reduce costs. A friend of mine who stuck around long enough to make it into management told me that they try to keep salaries at about the 40%-ile to save costs. On finding that out (as well as a few other gems), he left. Until I heard that, I couldn't figure why brilliant friends of mine often got raises that didn't even cover inflation. Don't they know that people are going to leave because of that? They know, and that's their strategy.

The thing about Bernanke comes out of left field. IBM didn't use low interest rates to invest therefore "the companies that were expected to spend us back to better economic health didn’t do so" therefore low interest rates didn't make the recession less severe than it otherwise would have been? No comment on whether or not those last two statements are actually true (I'm not an economist and haven't studied the issue), but Cringley certainly doesn't make a case for them.

There are impacts to this policy. By borrowing to buy back equity, you are increasing the chance of distress. You don't increase your cash position, but you do increase the amount of interest payments you have to it. (Albeit less due to the low rate environment) This means it is more difficult to bet on anything that isn't a sure thing.

That said, perhaps this is the best way for shareholders to wind down a company that can no longer innovate. At some point, large companies can cease to be innovative, and cease to profitably handle acquisitions. Then what? Especially if you're too big to be bought out yourself.

There are two options... One - Split yourself up and sell the parts to the highest bidders. Two - Buy back the shares. Shrinking the outstanding shareholder base will increase the per-share value even if the total corporate value is flat. Rather than waste money on innovation (if you can't) or M&A (if you overpay and underintegrate) better to give it back to the shareholders and let them invest capital in companies that can grow.

Borrowing to buy back shares is just taking case #2 to the extreme, and ultimately passing the buck to the long term bond holders.

But it overlooks a core problem that IBM faces. The cloud is a competitive platform for problems that previously required mainframes. They successfully defended (kinda) against Oracle/Sun in areas like running large banks and stock exchanges.

What happens to IBM when you can solve hard real-time transaction problems on 1000 loosely-coupled distributed computers instead of 1 large mainframe (made up of a 1000 processors with shared state)? That day is either here or close.

My take is that they can't ignore the cloud but they can't win it either. Tough place to be.

Fed policy affects things by changing the aggregates. But stock ownership can never change in the aggregate. If you have extra money and you buy some stock, for every dollar you spent buying stocks, someone else now a has a dollar from selling you the stocks. A common myth is that money can go "into" an asset class. It cannot. It's impossible for extra money to end up invested in stocks in aggregate, because for every buyer there must be a seller. Individually, you may have less money, but that's balanced by someone else having even more money now. Stock sales will never change the aggregate money supply nor aggregate investment nor total stock ownership. So what is cringely saying here?

I'd appreciate if anyone could explain the logic. I don't want to pre-judge, but my suspicion is that monetary policy is a subtle issue and that blaming the Fed is fun, both of which lead to mistakes such as this one.

(In fairness, perhaps the author means to say that specifically IBM used low interest rates to buy stock and not that businesses generally did this. That is a charitable interpretation that makes more sense and deviates only a little from what was actually written.)

I see that the author needed some connective tissue between the bit about The Fed and IBM's cloud plans but any IBMer/ex-IBMer can tell you they're out of touch. The disagreement is about when they lost it.

Most, including this author, will point to whenever the domain they're experts in was mismanaged to hell. But IBM will keep on trucking right past their foray into "the cloud," constantly chasing the latest fads, and letting older divisions wither and die because nobody in charge understand the tech domain well enough to salvage them.

You could argue low rates force the hand of some firms - the stock buyback argument made sense in the article and had me following. How a strategic decision like "Cloud is where we're going as a company" can be traced to the Fed? That's where I lose the thread. What if they had decided on another investment area? Would you be writing the same article? Would one write an "The Fed suckered Amazon into a successful cloud strategy" article?

What I do know is that IBM seems to be the #2 advertiser on TV and in magazines after that stupid gecko.

It is trying more and more to be like those Indian outsourcers like Wipro and Infosys, but the difference is that Wipro and Infosys pay the CEO at Indian rates and spend customer money on solving customer problems rather than sponsoring tennis and golf tournaments.

Earnings per share should be a natural byproduct of excelling in your market.